Weekly Top Stories - 9/6

This week in the newsletter, we write about World Liberty Financial, a forthcoming DeFi application backed by the Trump family, the expansion of Ethereum L2 Arbitrum's programmability, and a CFTC settlement with Uniswap Labs.

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Details Emerge About World Liberty Financial

The Trump-promoted pre-launch DeFi application will feature stablecoin borrow/lend functionality. CoinDesk reported that the new DeFi protocol will be launched by the same team behind Dough Finance, a recently exploited DeFi protocol. World Liberty Financial will reportedly be based on the same source code. Dough Finance was an AAVE wrapper on Ethereum that facilitates leverage looping with stablecoins for higher yield at the cost of a greater chance of liquidation. In response to CoinDesk's reporting, the Dough Finance team placed a password on Dough Finance's front end and deleted their public GitHub.

The World Liberty Financial Whitepaper lists Donald Trump as "Chief Crypto Advocate," Don Jr & Eric as "Web 3 Ambassadors", and Barron as "DeFi Visionary." Despite these named affiliations, the document claims separation between the former President and the project. The Whitepaper states that "World Liberty Financial is not owned, managed, operated, or sold by Donald J. Trump, the Trump Organization, or any of their respective family members, affiliates, or principals. However, they may own $WLFI and receive compensation from World Liberty Financial and its developers." At this time, it appears that the WLFI token is locked and non-transferrable, and would require a governance vote to make it transferable in the future. The timeframe for the launch of the application or any affiliated token ($WLFI) is unknown.

OUR TAKE:

While the full details about World Liberty Financial are not public yet, the involvement of the Dough Finance team certainly does raise questions. It is worth noting that on Tuesday the World Liberty Financial Telegram account made a long post in which they claimed that they have engaged "Zokyo, Fuzzland, Peckshield, BlockSecTeam, and more" and are "making security our primary concern."

As described in the white paper and by CoinDesk, the application is not necessarily game-changing or a bad idea on its face. If it is an easy UX for users to lend and borrow stablecoins from AAVE, the largest Ethereum DeFi application by TVL, that could be useful for some users.

Trump's involvement is risky, however. Associations have been vague, but Former President Trump did post on X/Twitter the World Liberty Financial handle on Aug. 29, and later reposted one of the DeFi app's posts. There is potentially significant reputational risk for Trump if the developers rug or there is a hack that results in loss of user funds. On the regulatory side, given the SEC's long history of enforcement on crypto, it is not outside the realm of possibility that Trump could find himself under a microscope for involvement in the project

But even outside regulatory risk, some in crypto are critical of the move overall. Castle Island's Nic Carter called the project "a huge mistake" and NYU adjunct professor Austin Campbell highlighted the pre-launch hype and noted it makes World Liberty Financial - its team, affiliates, the Trumps - "susceptible to all sorts of nonsense." At a minimum, it seems ill-timed given the primacy of election concerns. - Alex Thorn & Thad Pinakiewicz

In Style with Stylus

Arbitrum activates the Stylus upgrade, enabling developers to write smart contracts in Rust and other popular programming languages. On Arbitrum Day (the anniversary of Arbitrum's mainnet launch three years ago), Stylus was activated on Arbitrum mainnet. Stylus is a new way to write EVM-compatible smart contracts - Stylus introduces a new virtual machine (VM) that is interoperable with the EVM and is designed to execute WebAssembly (WASM) instead of EVM bytecode (which is primarily written in Solidity). This means that any language that compiles down to WASM is supported - including Rust, C, and C++!

Aside from the expanded reach to potential new developers, WASM programs also offer greater efficiency improvements. Stylus is a cheaper execution environment than the EVM, enabling major gas savings for complex smart contracts. It also opens up the potential for more complex cryptographic tasks, which can be used to power new use cases that were not technically feasible before. Some examples listed in Arbitrum's docs include generative art libraries that consume a bunch of RAM, Bringing existing games written in C++ on-chain, and compute-heavy AI models. Several apps that are already building with Stylus include Renegade Finance (an onchain dark pool), Superposition (cross-chain liquidity), Crypto Valley Exchange (portfolio margin management leveraging Rust, WASM, and LLVM), and Fairblock (implement MPC-schemes that otherwise would not be feasible using only EVM opcodes).

Over the coming weeks, live workshops and AMAs will be hosted to educate interested builders on Stylus. In addition, a DAO proposal is currently under consideration to fund Stylus Sprint, an incentive program for builders to use Stylus, with up to 5m ARB. If passed, team applications would begin in early October.

OUR TAKE:

With the activation of Stylus, Arbitrum is now the first major chain with multiple co-equal virtual machines and the first Ethereum rollup to enable smart contract support for both Solidity AND Rust. Arbitrum already stands out among other rollups for its leading tech innovation and decentralization progress (and for being the only optimistic rollup with operational fraud proofs). Stylus now offers another major differentiator for Arbitrum in an increasingly competitive landscape of Ethereum L2s.

Stylus opens the door to significantly greater innovation for Arbitrum - today, Solidity developers are estimated to be around 20k, which is significantly less than Rust (~3m devs) and C/C++ (~12m devs). WASM programs leverage decades of compiler development for Rust and C, meaning builders already have significant tooling in place to easily port over existing programs to Arbitrum or develop new ones on Arbitrum. If the efficiency benefits of WASM over the EVM are as impressive as claimed, then Stylus could easily be the spark to deliver new, innovative applications and reignite interest in our beaten-down crypto sector. - Charles Yu

Uniswap Settles with CFTC over Leveraged Tokens

CFTC fines Uniswap Labs $175k for listing leveraged tokens. In a press release Tuesday, the CFTC wrote that "to facilitate access to the protocol, Uniswap Labs developed and maintained a web interface that made it available to users… among the digital assets traded on the protocol and through the interface were a limited number of leveraged tokens, which provided users leveraged exposure to digital assets such as Ether and Bitcoin. The order finds these leveraged tokens are leveraged or margined commodity transactions that did not result in actual delivery within 28 days and therefore can be offered to Non-Eligible Contract Participants only on a board of trade that has been designated or registered by the CFTC as a contract market, which Uniswap Labs was not."

CFTC Commissioner Summer Mersinger published a scathing dissent, arguing that "this case has all the hallmarks of what we have come to know as "regulation through enforcement."

OUR TAKE:

The enforcement is against Uniswap Labs, the developer of both the Uniswap automated market-making smart contract application and also the web interface at Uniswap.org. That "DeFI front end" is a centralized web UX that allows users to manually interact with the decentralized exchange that is Uniswap on Ethereum. The CFTC's action here appears related solely to the centralized web front end and not the underlying decentralized smart contract application. That is an extremely important distinction.

If the CFTC - or any regulator - moves to sanction, enforce, or hold liable smart contracts themselves, such an action would pose a much more existential risk to blockchains and their applications. We wrote in the Summer of 2023 about how DeFi front ends are at risk of being classified as "brokers" under the IRS and the same analysis applies here. In response to these types of enforcements and regulations - whether from the CFTC, in reaction to the SEC's exchange definition the IRS broker rule, or some other rule - DeFi front ends are likely to face further scrutiny.

In this case, the universe of leveraged tokens was very small, but pressure will mount if we see the SEC or IRS begin taking action. The universe of tokens that the SEC currently claims are securities is much larger, and the IRS also could cast a wide net. To deal with this, DeFi front ends could be forced to KYC users of the front end or even "whitelist" tokens that appear there. This is also fraught, though - while reducing the risk that a disfavored asset appears on the front end, pre-approving all assets would effectively turn these front ends into centralized exchanges and potentially create an even larger liability. A possible solution is for developers to build open source, decentralized, "local" front-end software that users can download and run on their own computers as a means to manually and easily access DeFi smart contracts onchain. - Alex Thorn

Charts of the Week

Fees paid to Ethereum from Layer 2 networks have fallen sharply since the implementation of EIP-4844 on March 13, 2024. The upgrade introduced a more cost-efficient way for rollups to post their data to Ethereum through blobs, which is reserved data storage space on Ethereum's consensus layer. Daily fees paid by zkSync, OP Mainnet, Base, Arbitrum, Scroll, and Linea, some of the most widely used and largest Ethereum Layer 2s by total value locked (TVL), have averaged $116.4k since blobs went live. This compares to an average daily fee paid of $1.077m from these networks in the period between December 1, 2023, and March 12, 2024.

Some of the fees paid by Layer 2s go directly to validators in the form of tips, and the remaining base and blob fees paid are burned and removed from circulation. As a result, the decline in fees marks a significant headwind for the revenue generated by Ethereum validators and the inflation rate of ETH. In the 90-day period leading into EIP-4844 Ethereum earned an average of $8.5m in daily fees paid to the network. Since then, it has averaged $3.7m daily representing a 56% decline. On August 31, 2024, Ethereum network fees totaled ~$405,000, the lowest daily revenue day since June 2020. The decline in fees paid has also pushed the inflation rate of ETH to 0.71% using the 30-day moving average, a level of inflation last seen in October 2022.

Check out Galaxy Research's public Dune dashboard and our recent report on Dencun to learn more about EIP-4844 and its impact on Ethereum and the supply of ETH.

Other News

• SEC charges and settles with crypto-focused Galois Capital over custody issues

• SEC Commissioner Mark Uyeda calls for S-1 form tailored for digital assets

• Polygon developers transition MATIC token to POL

• Ethereum CME futures trading volume hits 9-month low in August

• DeFi protocol Penpie exploited for $27M of crypto assets

• EigenLayer plans to distribute 86 million tokens to stakeholders in season 2 'stakedrop''

• Telegram CEO Pavel Durov promises changes, moderation of private chats

• Trump promises to embrace crypto, AI in speech before Economic Club of New York

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